On July 9, sandwich chain Potbelly reported preliminary second quarter results that missed the Zacks Consensus. It also lowered its full year guidance.
Investors were disappointed with the numbers and the stock plunged.
In the last month, Potbelly shares have fallen 25%, and they are now down 62% from the 2013 IPO peak. Shares are now even trading well below the 2013 IPO price.
After selling off by 62%, it MUST be a deal now, right?
But with full year guidance cut virtually in half, Potbelly is now expected only to make $ 0.19 this year. Even after the sell off, it is still trading with a sky high forward P/E of 61.
When you drill down into its fundamentals, that’s not a deal at all.
What Makes a Stock a Deal?
Just because a stock plunges that doesn’t mean it’s suddenly a deal. Fundamentals still matter.
1. Check Valuation
A sudden plunge in share price doesn’t immediately mean a stock is truly on sale. Check the forward P/E for valuation. Was the stock trading at 50 times before the plunge and now trading at 40 times? That doesn’t necessarily mean it’s cheap. Check to see what peers are trading at.
Growth stocks will obviously have higher P/Es than value stocks, but a stock that’s a deal will be closer to its historic valuation.
2. Is There Growth?
Why did the stock plunge? The earnings growth rate can tell you if the plunge was a one time event or not. Is earnings growth still expected either this year or next?
Potbelly’s, for example, is sending up a red flag. Earnings are expected to actually decline by 44% compared to last year. That’s a steep drop in earnings.
Sell-offs, however, are often overdone. When there’s panic, that’s an opportunity for investors to step in and get a deal on a stock.
3 Stocks That Are Deals Right Now
The recent stock pullback has created an opportunity for investors in some stocks that were otherwise out of their reach just a few weeks ago.
These 3 stocks have gone from overvalued growth stocks with solid fundamentals to deals. All three are Zacks Rank #3 (Hold) stocks.
If you liked them when they were hot, you’re definitely going to like them when they’re on sale.
1. On Assignment Inc.
2. Smith & Wesson Holding Corporation
3. Matrix Service Company
1. On Assignment (ASGN – Snapshot Report)
On Assignment provides skilled professional workers in the IT and healthcare markets in the United States, Europe and Canada. It recently reported disappointing second quarter results which hit the shares hard.
What went wrong? It guided to the low end of its 2014 guidance due to a slower than expected recovery in the high end IT business and a pause in the mid-IT jobs. Neither area appears to be an ongoing problem. The analysts believe the high end IT market is picking up.
Why it’s a deal:
Shares are down 27.7% in the last month
Forward P/E of just 14 versus historic median of 23
Expected 2014 EPS growth: 58%
2. Smith & Wesson (SWHC – Snapshot Report)
It was another amazing earnings beat in the fiscal fourth quarter for firearm maker Smith & Wesson so why did the stock sell off?
The company gave disappointing fiscal first quarter and full year 2015 revenue and earnings guidance. It guided revenue to decline 5% in 2015. Even though investors have known that gun demand was slowing, at least in the long guns, the guidance came as a shock after years of solid revenue growth.
Analysts, however, are taking a longer term view. Smith & Wesson continues to take handgun market share from competitors, and the handgun market is still growing in the double digits. It also has several new products in the hopper, which are expected to be announced this summer.
So while growth is expected to pause in fiscal 2015, the analysts aren’t counting Smith & Wesson out just yet.
Why it’s a deal:
Shares fell about 16% in the last month
Forward P/E of just 9.2 versus historic median of 14.5
Expected 2014 EPS growth: – 9% BUT expected to rebound 14% next year
3. Matrix Service (MTRX – Snapshot Report)
Matrix Service is an engineering, construction fabrication and maintenance services firm to the oil, gas, power and petrochemical industries in the United States and Canada.
In May it reported a record third quarter as its storage tank backlog rose 28% year over year. It beat the Zacks Consensus by 23%.
But Matrix is a small cap company with a market cap of just $ 700 million. Shares had doubled over the last year. In the last month, as small caps weakened, investors dumped the stock. It doesn’t report next quarter’s earnings until early September.
Why it’s a deal:
Shares tanked 18.4% in the last month
Forward P/E of just 15.3. Before the shares plunged they were trading at 20x.
Expected 2014 growth: 42%
2015 looks juicy too with expected EPS growth of 24%
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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at@TraceyRyniec.